AS 22 Accounting For Taxes on Income | Deferred Tax Calculation. In the previous article, we have given AS 28 Impairment of Assets and AS 18 Related Party Disclosures. Today we are providing the complete details of accounting standard 22 accounting for taxes on income I;e objective, scope, definitions, journal entries, deferred tax asset, re-assessment of Unrecognized deferred tax assets and disclosure. You can also download AS 22 accounting for taxes on income notes by ICAI at the end of this article. This notes is useful for CA Final students.
Accounting Standard (AS) 22 Accounting For Taxes on Income
The objective of this Standard is to prescribe accounting treatment for taxes on income. Taxes on income is one of the significant items in the statement of profit and loss of an enterprise. In accordance with the matching concept, taxes on income are accrued in the same period as the revenue and expenses to which they relate. Matching of such taxes against revenue for a period poses special problems arising from the fact that in a number of cases, taxable income may be significantly different from the accounting income.
This divergence between taxable income and accounting income arises due to two main reasons. Firstly, there are differences between items of revenue and expenses as appearing in the statement of profit and loss and the items which are considered as revenue, expenses or deductions for tax purposes. Secondly, there are differences between the amount in respect of a particular item of revenue or expense as recognized in the statement of profit and loss and the corresponding amount which is recognized for the computation of taxable income.
This Standard should be applied in accounting for taxes on income. This includes the determination of the amount of the expense or saving related to taxes on income in respect of an accounting period and the disclosure of such an amount in the financial statements.
For the purpose of this Standard, the following terms are used with the meanings specified:
1) Accounting income (loss) is the net profit or loss for a period, as reported in the statement of profit and loss, before deducting income tax expense or adding income tax saving.
2) Taxable income (tax loss) is the amount of the income (loss) for a period, determined in accordance with the tax laws, based upon which income tax payable (recoverable) is determined.
3) Tax expense (tax saving) is the aggregate of current tax and deferred tax charged or credited to the statement of profit and loss for the period.
4) Current tax is the amount of income tax determined to be payable (recoverable) in respect of the taxable income (tax loss) for a period.
5) Deferred tax is the tax effect of timing differences.
6) Timing differences are the differences between taxable income and accounting income for a period that originate in one period and are capable of reversal in one or more subsequent periods.
7) Permanent differences are the differences between taxable income and accounting income for a period that originate in one period and do not reverse subsequently.
Deferred tax is the tax effect of timing differences. Model journal entries to be passed in books of account should be as under:
Current Tax A/c ………..Dr
To Provision for Current Tax
Deferred Tax A/c ………Dr
To Deferred Tax Liability A/c
Deferred Tax Assets A/c …….Dr
To Deferred Tax A/c
Tax Expense A/c……Dr
Deferred Tax A/c……Dr (In case DTA is created)
To Current Tax A/c
To Deferred Tax A/c (In case DTL is created)
To Current Tax A/c
Deferred Tax Asset (DTA)
It should be recognized and carried forward only to the extent that there is a reasonable certainty that sufficient future taxable income will be available against which such deferred tax assets can be reversed/ realized.
Example: Deferred Tax Asset should be created in respect of taxable loss being carried forward, when there is reasonable certainty that carried forward taxable loss will be set off. (i.e. Adequate taxable profit is expected in future)
The carrying amount of deferred tax assets should be reviewed at each balance sheet date. An enterprise should write down the carrying amount of deferred tax asset to the extent that it is no longer reasonably certain that sufficient profits will be available.
Such, written down value can be re-stated if it becomes virtually certain that sufficient profits will be available (for set off).
Re-assessment of Unrecognized Deferred Tax Assets
At each balance sheet date, an enterprise re-assesses unrecognized deferred tax assets. The enterprise recognizes previously unrecognized deferred tax assets to the extent that it has become reasonably certain or virtually certain, as the case may be, that sufficient future taxable income will be available against which such deferred tax assets can be realized.
Points to remember:
- When accounting profit/ loss is higher than taxable profit/loss: Deferred Tax liability is created or Deferred tax asset is reversed.
- When accounting profit/loss is less than taxable profit/loss: Deferred tax asset is created or Deferred Tax Liability is reversed.
- When taxable loss is carried forward for set off: Deferred Tax Asset is created.
- When carried forward taxable loss is set off: Deferred Tax Asset is reversed.
- Deferred tax assets and liabilities should be measured using the tax rates and tax laws that have been enacted or substantively enacted by the balance sheet date.
- Deferred tax assets and liabilities should not be discounted to their present value.
Presentation & Disclosure
In the Balance Sheet, a Deferred Tax Asset should be shown after the head “INVESTMENT” and Deferred Tax Liability should be shown after the head “UNSECURED LOAN”.
Current Tax assets and liabilities should be separately shown with Deferred Tax assets and liabilities.
Deferred Tax asset is set-off with deferred tax liabilities when
- the enterprise has a legally enforceable right to set-off assets against liabilities representing current tax; and
- the deferred tax assets and the deferred tax liabilities relate to taxes on income levied by the same governing taxation laws.
The nature of the evidence supporting the recognition of deferred tax assets should be disclosed, if an enterprise has unabsorbed depreciation or carry forward of losses under tax laws.
Click Here to download AS 22 accounting for taxes on income notes by ICAI.
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